This is a rush transcript of "Special Report With Bret Baier" from September 2, 2009. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

HOUSE SPEAKER NANCY PELOSI, D-CALIF.: I don't know about any changes to th e public option. As I have said right from day one, the president has said the public option is the best way to keep the insurance companies honest. And he has said, if you have a better way to do this, put it on the table. So we're waiting for someone to put something on the table.

REP. DARRELL ISSA, R-CALIF.: One of the challenges we face is we have been locked out of the process from day one. The argument over public option/no public option is between the Blue Dogs and the progressives.

(END VIDEO CLIP)

BRET BAIER, HOST: The argument over this government-run option — the public option — has been a focus, obviously, for this debate. The president is said to be retooling the health care reform pitch. He will deliver an address to a joint session of Congress a week from tonight.

Again, the House speaker said today we can't pass a bill without a public option — she reiterated that.

What about all of this? Let's bring in our panel: Steve Hayes, senior writer for The Weekly Standard; A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer.

Steve, the president, the White House, believes delivering another speech to retool this message is what they have to do. What about that?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: This seems to be the reflexive strategy whenever they are in trouble: Attack Republicans and give us more Obama. It is totally unclear that that will solve the problem he's in. And it strikes me a blatant misdiagnosis of the problem.

Barack Obama doesn't have a message problem at this point. He has a substance problem. And attacking Republicans for the problems he is having with Democrats is, you know, it's throwing something over there and expecting people to go look and go chase it.

It won't work. People know too much about this already.

The real difficulty I think he has is that he is now — we're hearing these discussions that he is going to get more specific. More specific will necessarily mean he's going to have to give us details about how he intends to pay for this.

And I think there he has two options: One, he can talk about more savings. I think savings that we have seen could be imaginary, that at least the Congressional Budget Office and others don't see, or he is going to have to talk about taxes.

In one case, if he talks about savings, I think people won't believe him, and in the other if he talks about taxes, it won't be popular.

BAIER: A.B., the House speaker said again, "We will have a public option in this bill. We can't pass it without a public option."

Now everybody at the White House, at least privately, is saying that it looks like the president will come out and say we're not going to have a public option.

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: Right, and she has a few days to accept. It doesn't mean that the House won't go ahead and do something like that, but I think the decision is instead of — the White House feels it's better for the president to come out and say goodbye to the public option right away, up front than to have a House-passed bill with a public option that goes to the conference between the two chambers and gets dropped.

This speech on Wednesday of next week is not going to be so effective, I believe, with the public, not going to convince Steven and people who have not understood what he has been behind, what his health care principles are. It is really an opportunity to just answer critics that he hasn't been specific. The real work will be done off camera, behind closed doors, with the members of his party, a divided party. And he will say I have now laid out four specific things. You get behind me, or we're all going to fall in the midterm elections.

BAIER: Charles?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think this speech has to be dramatic. It has to be a reset. It has to be a restaging of this debate, because he has lost Act One. It has got to be an opening curtain on Act Two, and it can't just be a repetition of his old positions.

I think the way they are headed is to try to say — have the president do a nod to the discontent and the anxiety that was generated over the summer.

But then, I think if they are smart and political cynical, which I think are, what they will try to do is say that the reason the president could not be specific is because while negotiations were going on with Republicans, specifically the Gang of Six in the Senate, he wanted to not preclude any possible agreements or compromises.

But now that the Republicans have walked away, and I suspect he will attack Senators Grassley and Enzi specifically, and say, well, now that the Republicans are going to be entirely obstructionists, well, now I'm able to be specific, and now I will be specific, and now this summer of discontent in which I had to be either evasive or ambiguous or at least open is over. The Republicans have forced my hand, and now I'm going to say X, Y and Z.

But he has to say X, Y and Z. He has to make a pronouncement on the public option, and he also has to make a critical strategic decision. Is this about cutting costs, which will destroy him in popular opinion, or does he ignore that now and make it all about expansion of coverage and in guaranteeing of coverage?

BAIER: But if he does what you say he will do, it seems like abandoning the negotiations completely would lend itself more to, OK, let's try to push through a public option.

KRAUTHAMMER: He might. I'm not sure which way he will go. All the indications are that they he will drop a public option, but not because of the Republicans, because of the Blue Dogs.

In the end, as Mara once said, there is no liberal in the House that is going to lose his seat if there is not a public option. There are a lot of moderates in the House who will lose their seat if there is a public option.

Case closed.

BAIER: A.B., we saw how the left was enraged when this whole debate came out in the first place, whether it was going to be included or not. Now, when the president delivers this speech, and if, in fact, he does drop it, then what happens?

STODDARD: Labor is threatening mutiny. He still has incredible heat from the left on this issue. And he will, after he lays down the law.

But I have a feeling that he is working with the Senate right now on what the members of Senate caucus, the members of the Senate caucus, much more moderate and conservative Democratic caucus, can stomach.

Is it a $700 billion bill? Is it a $900 billion bill? Is there no employer mandate, but an individual mandate? What is the subsidies for new coverage? And they are going to massage some kind of message for him to lay down.

Ultimately, the House progressive wing is going to get less out of this.

I would say quickly on those Republicans, I think it is the job of the spokesman at the White House to beat up on Senator Enzi. I don't think Barack Obama is going to get up and beat up on those guys.

I think they want them at the table. The talks proceed this week. Senator Enzi's staff invited me to meet with them tomorrow and they said they're still at the table. I think the White House will try to string that along a little bit longer.

BAIER: Last word, Steve.

KRAUTHAMMER: You aren't cynical enough, I'm afraid.

(LAUGHTER)

STODDARD: That's a compliment.

HAYES: I think he is essentially calling the left's bluff if he opts to go without the public option, and they're not going to ditch him. It's not going to happen.

BAIER: When we return, the panel sorts out about who knew what and when they knew it about the release of the Lockerbie bomber.

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(BEGIN VIDEO CLIP)

BRITISH PRIME MINISTER GORDON BROWN: There was no conspiracy, no cover-up, no double-dealing, no deal in oil, no attempt to instruct Scottish ministers, no private assurances by me to Colonel Ghadafi. We were absolutely clear throughout with the Libyans and everyone else that this was a decision for the Scottish government.

(END VIDEO CLIP)

BAIER: British Prime Minister Gordon Brown very defensive today in his explanation of the Scottish decision to release the only man convicted in the 1998 bombing of Pan Am Flight 103, Abdel Baset al-Megrahi.

What about this? Who knew what when, and what about our administration?

We're back with the panel — Charles?

KRAUTHAMMER: As they would say in the British parliament, rubbish and not believable.

It is quite obvious that all discussions about this terrorist, hovering over it and behind it and all around it, was considerations of British relations with Libya, which means British financial interests are in Libya, which means oil.

We even have a letter from Jack Straw, who at the time was the justice minister, 2008, writing to the first minister of Scotland, emphasizing how important relations between the U.K. and Libya are to Britain and to the entire world.

Now, why are justice ministers talking about international relations unless the implication is obvious in considering the release of this guy — keep in mind that relations between us and Qaddafi and Libya are important financially?

Now, what I want to say is that even though it is scandalous, we have to remember that the British in Iraq and Afghanistan have been stalwart allies and extremely supportive and sacrificial.

What is happening here happens all among the Europeans is when it comes with dealing with specific acts of terror, they go soft, often in return for financial concessions — in dealings with Iran, with Libya, and with a lot of others. So there's nothing new here except that in the Lockerbie case it was so obvious, public and humiliating.

BAIER: A.B.?

STODDARD: Now that David Cameron is calling for an inquiry and saying this is fishy, if any more evidence turns up that the Scottish officials were pressured by Brown — we already have a former foreign minister relaying to Libyan foreign officials that Gordon Brown didn't want to see Megrahi die in prison — if anything more comes up, he's finished.

I have no idea why he risked his alliance with the United States and his electoral prospects. He is incredibly unpopular.

And as Cameron said, if you are of the mind that this case wasn't decided correctly, you build a new case with fresh evidence. You don't give someone early release who is convicted of killing hundreds of people.

BAIER: Conservative Party leader David Cameron about that investigation.

Steve, what about what our administration did or didn't do and what the Obama administration knew? There is still some questions about this conference call that Eric Holder was on and who said what.

I mean, we don't have a lot of answers here.

HAYES: No, a lot of questions still unanswered from the most transparent administration in history. I think that they need to fill in those gaps. It is something that people are going to need to know.

I think if you take a step back and look at the entirety of the situation, it is, I think, clear that if Barack Obama had brought to bear the entire weight of the White House, things could have turned out differently.

Now, I'm not blaming the Obama White House for Megrahi's release. I think there were a number of steps at which he could have intervened. We could have done something positive to at least have made this more difficult or expressed our opinions. Apparently Hillary Clinton and others said under no uncertain terms we do not want him released.

But I'd like to know what else they said. I mean, were there veiled threats? What specifics did we give them that would have said this could jeopardize or at least partially jeopardize the relationship that we have? This is an outrage. He killed nearly 300 Americans.

BAIER: Charles, Colonel Qaddafi is set to arrive in New York for a United Nations meeting later this month. Susan Rice, the U.S. ambassador to the United Nations, said today that how he chooses to comport himself when he attends the General Assembly in New York has the potential either to further aggravate those feelings and emotions or not.

KRAUTHAMMER: That is a pathetic statement.

Here is a spokesman for the strongest nation on Earth asking that a thug and a terrorist act nicely while in New York so you don't embarrass us.

Look, the real scandal here is that the guy who was convicted and released was not acting alone. It is all a kabuki dance. Everybody understands that. This one guy didn't decide he would destroy a U.S. air plane and kill 300 people on this own. Qaddafi was obviously involved, or at least his secret services, who provided assistance and support.

So all along it has been a charade and a disgrace, but that's how we deal with individual acts of terror. We have always acted weakly because there are no good alternatives. I don't want to exonerate them, but there is nothing new here. It just looks real bad on television.

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